Spain to accept European economic bailout

Struggling nation is offered aid of up to $125 billion

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Luis de Guindos, Spain’s economy minister, said Spain should not be seen as the fourth euro economy requiring a bailout since the money would be used only to recapitalize banks.

By Annie Lowrey and Paul Geitner
New York Times
June 10, 2012

BRUSSELS - Spain agreed on Saturday to accept a European bailout to try to stabilize its cash-starved banks, after increasingly desperate calls from world leaders to accept the money before Greek elections next week that they fear could cause havoc in the markets.

European ministers offered Spain up to $125 billion on Saturday, according to a eurozone official speaking on the condition of anonymity, but Spanish officials did not indicate how much they would accept.

At a news conference after European finance ministers met Saturday, Luis de Guindos, the Spanish economy minister, said in Madrid that Spain had requested emergency financing for its banks.

De Guindos insisted that Spain should not be seen as the fourth euro economy requiring a bailout - after Greece, Ireland, and Portugal - since the money would be used only to recapitalize banks.

“This has nothing to do at all with an absolute bailout,’’ he said. “It is financial support aimed and given to the Spanish bailout fund, and the Spanish bailout fund will inject this capital to those Spanish institutions that require it as stated by the International Monetary Fund. Not all the financial institutions in Spain need capital.’’

De Guindos said that the terms of the emergency loan would be “very favorable’’ but only set in coming days.

The news came after the IMF, in an apparent bid to pressure Spain to accept financial help, released a report days earlier than expected saying the banks would need nearly $50 billion in extra capital just to guard against a deepening of the country’s economic crisis.

The release of the estimate Friday night, several days early, came hours before finance ministers from the 17 eurozone countries held a conference call to try to persuade the Spanish government to swallow its pride and ask for help.

The IMF estimate did not include costs associated with the need for banks to restructure, or to book losses on loans.

Those costs would drive up the needed infusion of cash to as much as $125 billion, according to estimates by private firms.

Spain’s eurozone partners have been pushing the government in Madrid to bolster the country’s fragile banking system ahead of elections in Greece next week - the outcome of which could further destabilize the shared currency.

European officials hope an infusion of cash for Spain will strip some uncertainty from the markets, which will be roiled enough if the Greek election ushers in a government that upends the country’s bailout agreement.

In what some have seen as a game of brinkmanship, however, Prime Minister Mariano Rajoy of Spain has delayed seeking outside help, trying to use the fear of economic contagion to get financial aid under better terms than those that Greece, Ireland, and Portugal received when they were bailed out.

Spanish officials had been saying they first wanted to review the audit by the IMF, as well as ones by two independent consulting firms, whose first results are not due until June 21. Spain wants to avoid a repeat of the miscalculation of the problems at Bankia, a giant Spanish mortgage lender that was nationalized last month because of the growing number of bad loans on its books.

The IMF’s early release of its report was a sign of the urgency felt in Europe.

It estimated the banks would need to raise about $46 billion.

“The extent and persistence of the economic deterioration may imply further bank losses,’’ Ceyla Pazarbasioglu, deputy director of the fund’s monetary and capital markets department, said in a statement. “Full implementation of reforms as well as establishing a credible public backstop are critical for preserving financial stability going forward.’’

Spanish banks are struggling with significant losses in their real estate loan portfolios, and they have been hurt by the country’s broader economic malaise, which has helped push Spain’s borrowing costs close to record highs.

On Friday, President Obama urged European leaders to stabilize their financial sector and end their long-simmering sovereign debt crisis.

“These decisions are fundamentally in the hands of Europe’s leaders, and fortunately they understand the seriousness of the situation and the urgent need to act,’’ Obama said at a news conference. “They’ve got to stabilize their financial system.’’

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